Consultation Paper Launched by ESMA – Risk of ‘Greenwashing’ in Fund Names Used

The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, launched a consultation on the 18th of November 2022, seeking input on draft guidelines on the use in funds’ names of ESG or sustainability-related terms.

ESMA seeks to address the risk of ‘greenwashing’ concerning names used for investment funds which fail to meet evidence of sustainable characteristics outlined in the fund’s investment objectives, thus misleading investors. The consultation is therefore requesting feedback from all stakeholder’s on the introduction of quantitative thresholds for the minimum proportion of investments sufficient to support the ESG or sustainability-related terms in funds’ names.

In particular, the guidelines propose that a fund’s name is transparent and that such a name that contains ESG or sustainability-related terms must be supported in a material way within the terms of the investment objectives policy. 

Verena Ross, ESMA chair, stated ‘’ The objective is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims while providing both NCAs and asset managers with clear and measurable criteria to assess names of funds, including ESG or sustainability-related terms.”

ESMA is proposing the following:

a quantitative threshold (80%) for the use of ESG related words;

•         an additional threshold (50%) for the use of “sustainable” or any sustainability-related term only, as part of the 80% threshold;

•         application of minimum safeguards to all investments for funds using such terms (exclusion criteria);

•         additional considerations for specific types of funds (index and impact funds).

ESMA proposes that the draft guidelines become applicable three months after the publication of their translation on the ESMA website. ESMA suggests a transitional period of six months for those funds launched before the application date to comply with these Guidelines.

The consultation period will close on the 20th of February 2023, after which ESMA will then consider the feedback it receives to this consultation and finalise duly.